Pasture Rental Arrangements AgLease101.org a product of the North Central Farm Management Extension Committee

AgLease101.org © North Central Farm Management Extension Committee Why Seek Equitable Lease Arrangements Situations and locations vary Successful leases meet the needs of both parties 2

AgLease101.org © North Central Farm Management Extension Committee Factors to consider when developing an equitable lease 3

AgLease101.org © North Central Farm Management Extension Committee Stocking Rates Possible ways to delineate stocking rate –By the head –By animal units (both parties should agree on what an animal unit is) –By pounds Important to agree on the number, size and type of animals and the duration of the grazing period 4

AgLease101.org © North Central Farm Management Extension Committee Establish Land Owner and Livestock Owner Contributions Land owner costs may include: Interest on land value (valued for agricultural purposes) Taxes associated with the leased land Development cost conservation, drainage, improvements… Facility and buildings, fences, barns, wells (including the “DIRTI five”) 5

AgLease101.org © North Central Farm Management Extension Committee Sample: Land Owner Cost 6

AgLease101.org © North Central Farm Management Extension Committee Livestock Owners Net Returns Net Returns is usually estimated on a dollar per head ($/Head) basis State Budgets are usually available from local extension offices (these budgets are generalized and may need to be adjusted to fit the circumstances) Net Returns to grazing for terminal animals is equal to the value of the animal at the lease expiration minus the purchase cost/value and other operating expenses incurred during the lease period. Breeding animals and those used for other purposes require adjustments to this calculation 7

AgLease101.org © North Central Farm Management Extension Committee Sample: Livestock Owner Net Return 8

AgLease101.org © North Central Farm Management Extension Committee Lease Rates Using the information about cost of both the livestock and land owner, negotiations can proceed to determine and equitable agreement An equitable lease includes the type of payment. Either –Cash lease –Share lease 9

AgLease101.org © North Central Farm Management Extension Committee Cash Lease In this example land owner desires $27.03/acre or $108.13/head (sheet 1) The livestock owner wishes to pay only $15.23/acre or $60.91/head (sheet 2) The process of negotiation between the two parties will hopefully result in a price with which both can be happy. 10

AgLease101.org © North Central Farm Management Extension Committee Share of Gain Another method of establishing the price is to use share of contribution This requires honesty and credibility between both parties Lease rate is based on contribution percent (see the following slide worksheet 3, based on worksheets 1 and 2) 11

AgLease101.org © North Central Farm Management Extension Committee Sample: Share of Gain 12

AgLease101.org © North Central Farm Management Extension Committee Including Price and Production Risk in the Lease Characteristic of a variable lease agreement Both parties can bare some of the risk –Actual lease rate is dependent on the outcome –Requires a good understanding and a high degree of confidence and trust between parties 13

AgLease101.org © North Central Farm Management Extension Committee Production Risk Base rate for expected gain is estimated on a per pound basis At the conclusion of the production period actual gain is used to adjust the base rate 14

AgLease101.org © North Central Farm Management Extension Committee Sample: Production Risk Rate A 4 month lease for $25.00 per head per month or $ a head has an expected outcome for the yearling calves to have gained 220 pounds These factors translate into $.45/pound gain per calf ($ divided by 220 pounds) A higher rate of gain such as 300 pounds would result in the land owner receiving $135.00/head for the 4 months (the agreed upon $.45/pound gain 15

AgLease101.org © North Central Farm Management Extension Committee Price Risk Adjustment Flexible rate formula method Uses a base rate derived from the Expected Price (long term 5 year average, Oct-Nov good-choice local steer price) Adjust based on an agreed upon price source (Current Price), such as average price for good-choice steer for the months of October and November at the local auction market. 16

AgLease101.org © North Central Farm Management Extension Committee Sample: Price Risk Adjustment Expect Price is $80/cwt Current Price is $100/cwt Base rate is $100/head for the lease term Then the $100 is multiplied by quotient of the Current Price of $100 divide by the Expected Price of $80 or 1.25 Making the adjusted lease rate $125/head 17

AgLease101.org © North Central Farm Management Extension Committee Other Factors Affecting Lease Rates Productivity Local conditions Adjacent rates Location Water Landlord services Size and scope of the land leased 18

AgLease101.org © North Central Farm Management Extension Committee Improved Pasture Leases Factors that are added with improved pastures Includes the added productive nature of the pasture and the added cost associated with its maintenance (irrigation, fertilizer…) and who bears the expense and the benefit 19

AgLease101.org © North Central Farm Management Extension Committee Drafting Your Lease Written Lease is superior to verbal lease Written details can solve problems before they occur and clarify ambiguity Serve as a reminder to the actual terms of the lease Serves as a go-to document in the case where heirs or others become involved 20

AgLease101.org © North Central Farm Management Extension Committee Things To Remember Not all states have the same laws when it comes to leased pasture and farm ground Termination dates and methods vary from state to state The information provided in this packet is for educational purposes; actual leases should be made with the appropriate legal advice from qualified advisors 21

AgLease101.org © North Central Farm Management Extension Committee Lease Publications at AgLease101.org Fixed and Flexible Cash Rental Arrangements For Your Farm (NCFMEC-01) Crop Share Rental Arrangements For Your Farm (NCFMEC-02) Pasture Rental Arrangements For Your Farm (NCFMEC-03) Rental Agreements For Farm Buildings and Livestock Facilities (NCFMEC-04) Beef Cow Rental Arrangements For Your Farm (NCFMEC-06) 22

AgLease101.org © North Central Farm Management Extension Committee North Central Farm Management Extension Committee AgLease 101 was developed with funding provided by the North Central Risk Management Education Center. Providing leadership in the development of high quality research-based extension programs and publications that anticipate and meet the ever-changing business management educational needs of agricultural producers of the North Central States. Our programs and publications capitalize on the expertise of farm management faculty from throughout the region and country.